What The Poverty Debate Misses

The outrage about the poverty line is mainly about using it to identify the poor for providing subsidised entitlements. However, even when we are able to identify them, we are not able to reach them. The experience with the public distribution system (PDS) shows this clearly.

The main instrument for providing foodgrains at low prices to poor consumers has been the PDS and its current incarnation, the targeted PDS (TPDS). As per the 2004-05 National Service Scheme survey, of the poorest 40% of households, only 34% had TPDS cards, while 18 % of the top 60% of the households had such cards. The income support provided was meagre and the cost to the government was 10 times that.

I have argued for many years for use of smart cards or food coupons, which was endorsed by the Economic Survey 2009-10. A person can go to any shop and buy designated food items at market price, paying part of the cost through a smart card or food coupons. The trader can exchange the coupons for money at any bank. These coupons would eliminate the diversion of PDS grains by traders. In fact, the system would eliminate the PDS itself. It would, however, involve the problem of printing and distributing the coupons to the poor, who will have to be identified.

The messy problem of printing and periodically issuing coupons can be eliminated with the use of the Unique Identification Number under the Aadhaar scheme. But even with the Aadhaar cards, the task of identifying the poor remains. The large exclusion and inclusion errors of the present system of issuing BPL cards will still persist.

One way to deal with the exclusion error is to go for a universal right to food under which everyone is entitled to subsidised foodgrains from the PDS, as proposed by the National Advisory Council. The food security Bill adopted by the empowered group of ministers aims to provide rice at Rs 3 per kg, wheat at Rs 2 per kg and coarse grains at Rs 1 per kg to priority households. Forty-six per cent of rural and 28% of urban households are to be the priority households. The scheme will cover 68% of the population and government`s subsidy outlay will increase to around Rs 95,000 crore.

This scheme will face two problems. Firstly, how to iden-tify the priority households to eliminate exclusion error and minimise inclusion error? Secondly, how to control diversion and make an enlarged PDS cost-efficient?

To resolve this, instead of identifying the poor, make PDS universal but exclude the clearly and easily identifiable rich. This will ensure that all the poor will be covered even at the cost of some undeserving rich getting covered. If all those who pay income tax, those who own motorised vehicles and all those in the organised sector, including government, with monthly emoluments of more than, say, Rs 15,000, are excluded, the inclusion error could be reduced. Further reduction could be achieved through self-selection if households are themselves required to purchase ration with an Aadhaar card, as many of the relatively well off would not find it worthwhile to claim their ration.

The problem of diversion can be taken care of by providing food coupons or Aadhaar card-linked entitlements that can be purchased at any shop. This would eliminate the problems of having to procure and distribute more than 50 million tonnes of foodgrains every year as also the problem of diversion. The costs of the PDS system would be greatly reduced.

Of course, the problem of traders charging high market price in remote areas can be a real one. In such selected areas, cooperative societies could be encouraged to run fair price shops which would stick to prices announced every week by the government. International experience indicates that this can work, as in the case of the 22,000 cooperative stores in remote areas of Mexico that sell food and other necessities, and provide competition to private traders in thin markets of remote areas.

Should entitlements be linked to purchase of foodgrains, or should one do cash transfer? Linking transfer to purchase of foodgrains increases the transaction cost for the consumer, which will encourage self-selection as better-off consumers will stay away. A problem of linking entitlements to the Aadhaar card is that the entitled person may be unable to go to a shop due to sickness or some emergency. This can be taken care of by permitting two members of a household to avail of the entitlement.

An unlinked cash transfer will enable the family to spend the money as it wishes, say, on milk or on sending the child to a better school. As is now well recognised, the transfer should be made in the name of the woman of the house to empower her. If this is done through Aadhaar cards, only she can use the money.

Since transfer linked to Aadhaar can significantly reduce, if not eliminate, diversion, the total outlay even with near-universal coverage can be much smaller than the present outlay. If we assume that of the 240 million households in the country, 40 million relatively rich households can be excluded, the remaining 200 million households can be provided Rs 4,500 per year with an estimated outlay of Rs 94,000 crore, keeping Rs 4,000 crore for administering cash transfers.